Improving housing affordability

A new report from the Australian Housing and Urban Research Institute (AHURI) released this July, investigates housing affordability in Australia and proposes new directions for housing tax reform.

Why is housing affordability a problem in Australia?

Housing affordability has been in steep decline in recent years, despite strong economic growth. The lack of affordable housing affects all sectors of society, but particularly lower-income earners and younger Australians. Australians rank housing affordability as the second biggest issue in need of political change, after health. But why has housing affordability become such a problem?

Led by eight reputable researchers, the recent AHURI report suggests tax policies at all levels of government are the key issue.

“There is increasing evidence that tax policy settings are contributing to the problem, exacerbating intergenerational inequality, inflated housing prices and reduced mobility,” says the report.

Local, state and federal governments have implemented policies such as abolishing transfer duty and reforming state land taxes, reducing the Capital Gains Tax (CGT) discount and limiting negative gearing in an attempt to improve housing affordability. But according to the report, the efforts have been “piecemeal and ineffective”.

The entrenched barriers to policy change include political interests, strong influence from lobby groups in defence of the status quo, as well as a general public pessimism that change is possible.

Pathways to change

According to the AHURI report, however, new directions in tax reform and housing affordability are possible. The researchers suggest three stages of reform.

Step one is to establish the need for national reform. If all government levels, and the public burn for change, then change is possible.

Step two is that policymakers work together across all levels of government, to develop policy that won’t negatively affect the property market, the Australian economy or disadvantaged Australians.

The third step is to ensure change is made gradually, over ten to fifteen years.

The researchers suggest the aim is to “incrementally modify policy settings to shift tax distribution to owners of high value properties to improve access and affordability in the Australian housing market.”

Tax reforms that need to happen

The researchers propose three key tax reform strategies to make property access fairer for all Australians.

1. Adjust income tax concessions, to benefit all levels of income: At this moment, income tax benefits disproportionately favour affluent households.

“Gradually reducing the generosity of capital gains tax and negative gearing provisions over a decade would have only a modest impact on the after-tax return from housing investments, with the exact figures depending on wage income, interest rates and capital growth,” says the AHURI report.

2. Include the value of the family home in the aged pension asset test: At this stage, age pension eligibility is not affected by the value of assets. The researchers suggest that including asset value in aged pension eligibility will influence buying decisions.
3. Harmonising stamp duty across state/territory borders: The researchers suggest that the third means to addressing housing affordability is to establish a national registry of property ownership, and a national property valuation and data collection system. There should be a flat stamp duty rate applied throughout Australia, which is formulated on national median house prices. The researchers suggest that over time, a higher rate should be applied to investors.

The hope is that access to property becomes fairer. Additionally, the researchers add: “revenue raised through the gradual reduction of income tax concessions available to property owners and investors should be invested in new social housing and rental supply.”